Archive for August, 2010

Colombia has come a long way since 2000 – the Government has reclaimed territories it had abandoned to drug traffickers and rebel armies, crime rates have fallen drastically, investor confidence is high and unemployment has dropped.

Growth during the 2008–09 global recession was at 4.6% and an economic development program now focuses on specific sectors – useful lessons for other developing countries.

It’s called the Productive Transformation Program (launched 2007) – a novel public–private partnership in 8 sectors. Early results suggest that tighter collaboration has built competitive advantages.

To explain, Colombia has a diversified industrial base focused on the internal market – due to earlier import substitution. Accordingly, most industries failed to become globally competitive, Colombia thus depends on oil, coal, coffee, fresh-cut flowers etc. The new program now aims to accelerate the growth of value-added sectors.

Rather than choose winners, Colombia a contest decided the initial sectors – the pre-condition was that protection would not be granted, but the government would educate and train the workforce, improve the regulatory environment, help with export promotion and develop the required infrastructure.

The first sectors chosen were outsourcing and off-shoring, software, cosmetics, personal-care products, health tourism, textiles & clothing, electricity, auto parts, printing & graphic arts. The government worked with businesses to implement a strategic agenda based around an understanding of the sector’s position in the local and global marketplace, and to define initiatives required to increase the sector’s competitiveness.

For example, in the outsourcing sector, India and the Philippines were studied, given their success serving the English-language market. Morocco was also studied to understand its approach to the French-language market. It was also concluded that Colombia has lower costs than other Latin American nations and could serve the US Hispanic market and multinationals in the region.

There is an important new working dynamic between the public sector and the business community. Columbia’s leaders are committed to accelerating the pace of the country’s economic development. The Productive Transformation Program is an important element in this process. And Colombia’s new government has promised to continue it.

Source: McKinsey’s Bogotá office

(Cockatoo member Sebastian Brown returned last month from a lengthy tour of South America, and noted that Colombia is indeed getting its act together, and is ahead of Equador, Chile, Peru and Bolivia on most performance criteria – Editor)

The eminent US economist was in Canberra in mid August. What a great guy!

He argues that there will always be waste where the Government intervenes to stimulate the economy. The alternative is the waste of people unemployed and underutilised capital. It is a judgement call and Australia has had the best response of any of the developed nations. His argument was that austerity is totally the wrong response to the GFC – all you do is create further unemployment which weighs down on the budget in extra costs of welfare payments. Businesses don’t invest because demand is lower and growth declines. The medicine for Greece is totally wrong.

Other key points

 In the US one in six cannot get a job. 50% of the unemployed have now been unemployed more than 6 months. Unemployment for Afro Americans is up to 50%. House prices have fallen by a third and2.5 to 3 million people will lose their homes this year. 25% of mortgagees owe more than the value of their home.

 In Europe the situation is worse – unemployment at 20% and youth unemployment at 40-50% in some countries.

 He was highly critical of the banks who have been bailed out after excessive risk taking and have not learned their lessons. All the incentives continue to be directed at promoting short sighted risk taking. Payment of staff through stock options promotes dishonesty and encouraged financial institutions to move losses off their balance sheets.

 There are costs and benefits of global integration. There needs to be regulatory circuit breakers otherwise the disease and contagion will spread like wildfire as it did with the GFC. As each country tries to compete to be the least regulatory regime, there is a race to the bottom. The race was won by Iceland.

 On climate change he argued that the present cost of carbon at zero should be $60 to $70 to reflect the real costs of greenhouse gas pollution. Once a carbon price is set businesses invest on the basis of greater certainty since they know through the price mechanism what is on or off the agenda. There will be less long term investment until there is the certainty of a carbon price.

We all know the world’s powerhouse is doing it tough. As one of our colleagues has said, we’re not sure if this is totally true…but it can’t be too far off track…and it is scary. It is Michael Moore stuff. We need the Yanks to again buy anything that moves, they can wear or has batteries.

Click on the link below to view a map of hoe the unemployment rate has worsened in the last couple of years. Click the arrow in the middle and watch how things changed. Incredible what “The Great Recession” has done. The darker the color, the higher the unemployment. it is BRUTAL stuff.

Some of the Cockatoo team recently spent a week on Denarau Island (Fiji), the biggest integrated tourism resort in the southern hemisphere. It’s about 5km from Nadi on the west coast, and the ‘island’ is separated from the mainland by a muddy 30 metre wide creek.

Critics say it’s an enclave for the rich, and not typical of the real Fiji. Well this is not entirely true, because it and other resorts are now core parts of the local economy, and a large proportion of the local population is inextricably linked to them.

Indeed, Denarau Island is a true cluster. We reckon it rates at around 78% on the Cluster ScoreCard®, a technique that the Cockatoo Network has developed to measure and compare clusters in different industries and countries. Outlined below is our preliminary assessment, based on the 10 criteria (note – the criteria are weighted, which is why they don’t add to 78%)

Social capital – The social system is quite harmonious. The Indian population, mainly Hindu, dates back 100 years and is critical to the functioning of the economy. The Fijiian population, some 55% of the population, is mainly Methodist. The various churches continue to play an important role in the social development of Fiji. The local press toes the government line, sensitive to the Bainimarama dictatorship. Despite the concerns of the Australian and NZ governments about the trashing of democracy, the locals happily go about their daily life – in actual fact, the cheeriness and politeness of the native Fijiians is a defining feature, and the Indo-Fijiians aren’t far behind. Rugby and soccer help provide social glue. 9/10.

Local champions – while the initial champions of Denarau Island are not in evidence, it’s the Nadi residents and workers who actively champion the resort. Thousands of Australian and NZ families also provide word-of-mouth testimonials. 8/10.

Critical mass of suppliers – the labour supply to the tourism resorts is HUGE. For example, the Sheraton/Westin operation employs 900 staff, most of whom work 32 hours/week. This equates to 1.2 staff per room. Virtually all resort staff is Fijiian – while the resort manager explained that the Indo-Fijiians worked in back office jobs because ‘they are good with figures’, there is surely an unwritten code in operation. In terms of other supplies, fruit and vegetables are supplied by local growers, and meat and dairy goods are mostly imported from Australia and NZ. Land, even outside the development zones, is relatively expensive. Inbound tourist operators, hire cars, taxis, buses, restaurants are extensive. The suppliers of airline services are critical e.g. cheap flights offered by Virgin Blue have stimulated tourism traffic. 9/10.

Governance structures – each resort appears to have a well-structured management system, and a wider group meets to decide with the local council on issues affecting all resorts. The national government does not appear to interfere. Things tick along pretty well, although NZ investors in strata titles at one resort are currently hurting allegedly due to slick advertising by a third party. 9/10.

Specialised infrastructure – there is a quality golf course, and a Marina/shopping and dining precinct hosts some 30 businesses. Nadi Airport provides the critical trigger – the NZ Government funded its construction during World War II as a base for the US Air Force. The site was one of the few pieces of flat land. 9/10.

Technology/knowledge formation – the secondary school system is quite good, and the Denerau Island resorts recruit their staff from the secondary schools and then train them up e.g. cookery, building maintenance, administration, environmental management. A strengthened role for multinational resort companies in training local staff and nurturing Fiji’s future leaders is much under-appreciated, and the Cockatoo Network’s Sunrise Program proposes initiatives in this field. 8/10.

Local competition – the biggest resort on Denarau Island is the US-owned Complex property Sheraton & Westin with a combined 700 rooms/villas, plus the US-owned Hilton, Radisson and Trendwest, plus the French-owned Sofitel. The competition stretches to the 50 resorts across Fiji’s two main islands, but particularly to the 30 or so from Nadi to the Coral Coast that feed off the proximity to Nadi Airport. 9/10

Sophisticated home demand – the resorts are outside the reach of most locals, hence this has not nor will be a major factor in its development. 3/10.

Growth prospects – strong upside still exists. The Westin resort was running at 75% occupancy in July 2010, which is good given the current global tourism market. Denarau Island itself has further land for development. Future tourism growth in the Fiji market is uncertain, although the Fijiian Government has devalued its currency to maintain its competitiveness, and is currently courting Asian investors and tourists. This is a legitimate response to Fiji’s cool political relations with its neighbours, and an effort to broaden its economic relationships. 7/10.

Existence of threat – this criterion is important for some clusters in terms of creating a ‘call to arms’. There are no major threats to Denarau Island. Traditionally the major threat to such tourism ventures are escalating airfares. However this is not an issue given the very competitive airfares currently available. Political risk is also minimal because tourism revenues are critically important to addressing Fiji’s chronic trade imbalance. The Bainimarama dictatorship does not appear to be a threat to the ongoing operation of the resorts. The main threats are nature-based i.e. cyclones, floods, tsunamis. 5/10.

We regularly feature a region with potential to build on particular competitive advantages. This month we focus on King Island.

This island in Bass Strait is a fascinating case study for regional development practitioners. King Island cheese and beef is now an international brand. Locals explained to me a few years back that the triggers were strong collaboration between its farmers, their uptake of QA systems, their attention to the whole supply chain, and the vision of the Gilbertson family when it ran the abattoir.

However the competitive disadvantage of the island remains the cost of airfares to the mainland, which restricts tourists arriving to enjoy first-hand the food, the marvellous 9 hole golf course, the scenery and walking trails etc. I figure that if that if the island’s population could recover to around 3,000 (currently 1700) and if Greg Norman or similar further developed the golf course, more competitive air fares might ensue, and thus strengthen its tourism and accommodation revenues. But I digress.

Last month the prospect emerged of King Island becoming a home to new settlers and displaced families from overseas. King Island Council sees it as a safe and beautiful place with a welcoming population, and many displaced families are looking for such locations.

Mayor Charles Arnold explained that they are not looking for a detention centre, or secure accommodation. “What we offer on King Island is a place families can live and be part of a warm community. We are also unique in that we have over 100 jobs that are presently filled by international students on working visas. While these students fit in very well, we really do want people to move here permanently.”

Gee, King Island Council deserves the highest praise for thinking outside the square and trying to solve the refugee problem in a more humanitarian and cost-effective manner than some of the efforts to date. As Charles emphasised, it’s about new settlers who might come from Burma, Iraq, Afghanistan or wherever to work in the abattoir, the cheese factory, the various farms or shops. It follows the example of the Cobram area that has assimilated Iraqi refugees into the rural lifestyle and job market. Charles indicated that his proposal is receiving serious consideration by the Department of Immigration. It’s seems that King Island would be best suited for families already assessed and given residency in Australia.

In any case, while immigration policy is the big up-front issue, it surely needs some cross-silo consideration to include employment, training, workplace relations, small business assistance, family and community development etc. Leaving it to solely the Department of Immigration risks a ‘thanks for your suggestion’ response. I hope I’m wrong because it’s a great test-case for federal and state agencies to work with the King Island community to develop a best practice model. In doing so, it would help other councils looking to push the envelope.

This article appeared in the ‘Good Oil’ column in LG Focus, August 2010

Julia Gillard says a re-elected Labor Government would give $200 million to boost affordable housing via a Building Better Regional Cities program. Only cities with significant population growth will be invited to apply – 15 winning councils to receive $13-15 million each for infrastructure to facilitate new housing e.g. roads, drains (sic), community facilities.

This is quite flawed. First, housing is one small part of the regional development equation – if this program is to have legs it needs to also cover infrastructure, education, training, environmental management and social harmony. Secondly, it’s yet another beauty contest whereby cities are pushed to compete rather than collaborate. Thirdly, there is an arbitrary minimum 30,000 population – but some smaller coastal towns are swelling. And why omit the second tier regional cities? This program will not happen, at least in the current format, assuming of course Labor wins.

The major parties in Australia have been struggling to cobble together a regional policy.

And as for the Greens, I shudder to think. Anyway one party asked my advice, so in the interests of an even-handed approach, we circulated a draft to some Cockatoo members, and the following is our conclusion.

“Best practice regional development involves enhancing the competitive advantage of regions, opening them out to the world, and value-adding their resources. This will be achieved by the following steps.

Dispensing with the current maze of competitive programs and grants, which only sets one town or region against all others. Dispense with handouts to marginal electorates.

The identification of broad areas of international competitive advantage held by regions (and cities, towns and localities within them).

The development of specific regional trade and investment proposals that align with these areas of competitive advantage. These proposals will be bundled where possible into commercially attractive packages, and presented to the international and local investment community i.e. foreign companies, foreign government agencies, local super funds, institutional investors.

The introduction of a program of trade and investment missions (inwards and outwards) to introduce regions and specific regional proposals to the world. This will be complemented by regional brand development where appropriate. These will be joint exercises with the States, RDA Committees and industry groups.

Re-invigoration of the TradeStart program, including restoration of the regional positions which were cut in the May 2010 Budget.

The preparation of infrastructure audits to improve the coordination of infrastructure expenditure and enhance regions’ competitive advantages. This will be done in collaboration with the States and local development agencies.